Marketing Chapter 14: Determining the best price

price- the amount customers pay and the methods of increasing the value of the product to the customers
pricing- establishing & communicating the value of products & services to customers.
factors in pricing- what the customer is willing to pay, enough to make a profit, in line w/ the competition
equilibrium- the amount of the product demanded is equal to the amount supplied
economic utility- added value in economic terms. The ability to satisfy the customers’ needs and wants in more than just the product itself. Ex) form, time, place, possession
form- making the product and making sure the product is what the customer wants. The better the product is targeted toward the customers needs, the higher the perceived value.
time- providing easy availability when customers need or want it.
place- process of making a good or service more easily available to potential customers. The easier it is to purchase a product, the more attractive it becomes.
possession- exchange of a product or service for money. The simpler the acquisition process usually leads to a higher perceived value of a good or service.
elasticity of demand- the relationship between changes in a product’s price & the demand for that product
inelastic demand- a price decrease will decrease total revenue, & price changes will have little effect on demand
examples of inelastic demand- the necessities; gas, toilet paper
elastic demand- a price decrease will increase total revenue, & price changes will have an effect on demand
examples of elastic demand- non-necessities; cars, clothing
price-fixing- competing companies at the same level in a channel of distribution cannot cooperate in establishing prices
price discrimination- cannot discriminate in the prices they charge to other businesses in their channel of distribution. A manufacturer must offer equivalent prices to all wholesalers or retailers.
price advertising- cannot mislead consumers through the advertising of prices. i.e. cannot advertise phony prices.
bait-and-switch- cannot lure customers with offers of low prices & then say the low-priced products are not available or are inferior.
unit pricing- products sold in varying quantities must list the price for a basic unit so customers can compare.
taxation-
tariffs
price range- the maximum and minimum prices that can be charged for a product
breakeven point- the quantity of a product that must be sold for total revenues to match total costs at a specific price
fixed costs- The costs to the business that do not change no matter what quantity is produced or sold * ex rent
variable costs- same price per unit but changes when you make more of it ex) wood for wooden items
Breakeven point = total fixed costs/ (price - variable costs per unit)
endpoints- maximum price (highest price that customers will pay for a product), minimum price (total cost per unit to produce and market the product)
selling price- the price charged for a product or service
product cost- includes the cost of parts and raw materials (or the price paid to a supplier for finished products, labor, transportation, insurance, and an amount for damaged, lost, or stolen products.
gross margin- difference between product cost and selling price; amount available to cover the business’s expenses and provide a profit on the sale of the product
operating expenses- all costs associated with business operations
net profit- the difference between the selling price and all costs and operating expenses associated with the product
markup- an amount added to the cost of a product to determine the selling
markdown- a reduction from the original selling price
3 components of a selling price- product cost, operating expenses, & profit
4 phases of the Product Life Cycle- Introduction, Growth, Maturity, Decline * some products go through it quickly, some stay in one for a long time
Introduction- product is new to the market, customer is not aware of product, no direct competitors, price high. * Early adopters- people dissatisfied w/ old products and like to experiment w/ new products. Become target for intro phase.
Growth- as new product becomes successful, more customers are interested & competitors enter the market. Product more widely distributed, prices & features improve, customers focus on perceived value most.
Maturity- profits start to decline. lots of competition, customers start to care more about price because products are so similar.
Decline- sales drop drastically & businesses try to get out of the market. Little room to improve product.
skimming price- a very high price designed to emphasize the quality or uniqueness of the product
penetration price- a very low price designed to increase the quantity sold of a product by emphasizing value
nonprice competition- business emphasize elements of its marketing mix other than price by developing a unique offering that meets an important customer need.
2 tools that help marketers identify the competitive environment & make better pricing decisions- product life cycles & consumer purchase classifications
one-price policy- all customers pay the same price
flexible pricing policy- allows customers to negotiate price within a price range
price lines- distinct categories of prices based on differences in product quality & features
FOB (free on board) pricing- identifies the location from which the buyer pays the transportation costs & takes title to the products purchased pricing
Zone pricing- different product or transportation costs are set for specific areas of the seller’s market
discounts & allowances- reductions in a price given to the customer in exchange for performing certain marketing activities or accepting something other than what would normally be expected in the exchange. * quantity discount- Offered to customers who buy large quantities * seasonal discount- Offered to customers who buy during times of the year when sales are low * cash discount- Offered to customers who pay with cash rather than credit or who pay their credit account balances off quickly * trade discount- Reduction in price offered to businesses at various levels in a channel of distribution (wholesalers and retailers) * trade-in allowance- Reduction in price in exchange for the customer’s old product when a new one is purchased * advertising allowance- Price reduction or cash payment given to channel members who participate in advertising the product * coupon- Price reduction offered by a channel member through a printed promotional certificate * rebate- Specific amount of money returned to the customer after a purchase is made
added value- services during and after the sale, complementary products or larger quantity for reduced unit price, prizes & premiums for purchases, incentives for regular purchasing
3 strategies businesses use to determine the final price a customer pays- one-price or flexible pricing policies, various price lines, geographic pricing (ex FOB and zone pricing), discounts & allowances, and added value such as prizes & frequent-buyer incentives.
Consumer credit – credit a retail business extends to the final consumer
Trade credit – credit offered by one business to another business, often because of the time lag between when a sale is negotiated and when the products are delivered.
Credit Procedures * Credit Policies- If a company decides to offer credit itself, one of the first decisions is whether to offer it on all products and to every customer. Next, the business develops a credit plan. It decides whether to offer its own credit plan or partner with another company such as a bank. Finally, it must develop the credit terms. The terms include the amount of credit that will be extended, the rate of interest to charge, and the length of time to give customers to pay. * Credit Approval- A business that plans to offer credit must determine the characteristics and qualifications of the customers that will be extended credit. Those factors typically include customers’ credit history, the resources they have that demonstrate their financial health, and the availability of the money with which they can make payments. Most businesses have a procedure through which customers apply for credit and provide financial references. These references include banks and other businesses from which they have obtained credit in the past. * Experian, Equifax → final consumers * Dun&Bradstreet → business customers * can be used to provide information on credit history * Collections- The procedures are needed so that customers are billed and payments are received at the appropriate time. Procedures for collecting overdue accounts are an important part of a credit system. Most businesses that offer credit have a small percentage of their accounts that are never collected. Even a small percentage of uncollected funds can make a credit plan unsuccessful. This results in losses and the need to increase prices for other customers. This is why businesses often accept credit cards where the issuer is responsible for collection and losses rather than offering their own credit.
Why should businesses extend credit? Credit makes it possible for both businesses and final consumers to purchase products they otherwise could not afford if they had to pay the full price all at one time.